Why the Fed remains very cautious about upcoming rate cuts
Few significant data came after the shutdown, while voices in favour of a pause after the probable year-end reduction are growing
A cut, with great caution. The December decision of the Fed's Monetary Policy Committee, the FOMC (Federal Open Market Committee) actually went from a 30% probability of a new Fed Funds Rate cut - to 3.50-3.75%, from 3.75-4% - to 100%, according to estimates by Thomas Simons and Michael Bacolas of Jefferies.
A majority decision
Simons and Bacolas, too, like many others, believe, however, that the few new figures have not added much to the overall picture: they know, for example, that - judging by public statements - the dissenters in favour of keeping the official lending rate steady seemed to be four or five only a few days ago; and that some positions have since been blunted. Possible in any case - one can deduce - a majority decision, with at least two members against a cut and two in favour, as in October, of a more incisive cut.
A decision "not taken for granted"
In September, the 'dots', the points that in a graph indicate the forecasts on the official cost of credit of the individual FOMC members, expressed a median of 3.625%, thus corresponding to another cut by the end of the year. However, Fed Chairman Jerome Powell had explained that a further cut in the cost of credit 'is by no means a foregone conclusion'. The December meeting will be accompanied by a new survey of rate expectations for the coming years; but the delay in the publication of macroeconomic data, which is not decisive, due to the shutdown makes the scenarios very indefinite.
Long-term stable expectations
The numbers say little that is new. Long-term inflation expectations measured in the markets have been stable for some time now, ranging between 2.2 and 2.3%, levels that are not entirely reassuring but which mark clear progress compared to the past. A little more concern may inspire the one-year expectations measured in a survey by the University of Michigan: stuck in October - at least those in the public domain - they still point to 4.6%, but could be affected by the one-off effect of tariffs, which has not yet faded.
Moderately high inflation
Inflation, however, remains higher than desirable: the Fed's benchmark personal consumption expenditures (Pce) index was still pointing to a sustained 2.8 per cent in September, up from 2.7 per cent in August, 2.6 per cent in July and 2.3 per cent in April. Also at the same level was the core index, which, after falling to 2.6 per cent in the spring, continues to hover between 2.8 and 2.9 per cent. Only the Fed's detailed analyses can perhaps identify how much is the effect of tariffs - which in the US represent a supply-side shock, to be ignored if they have no impact on expectations - and how much is 'genuine' inflation to be counteracted
